UNIT 2 – INVESTMENT PRACTICE
MOCK EXAM TWO
VERSION 12 – TESTED FROM 1 DECEMBER 2014
Key facts about the IMC Unit 2 exam
Syllabus
Tax tables for this syllabus
Number of questions
Time allowed
Target pass mark
IMC Unit 2 Version 12 tested from 1 December 2014
Tax tables used for IMC Syllabus Version 12
105
2 hours 20 minutes
The pass mark of the live exam seldom varies between 65%–
75%. We therefore recommend that candidates should aim to
achieve 75%–80% when using this mock exam.
•
Standard multiple choice – Candidates select 1 option of 4.
•
Item set – Candidates are given a short scenario with several
questions associated with it. The material given in the case
study does not change with the questions.
•
Gap fill – Candidates must enter a value into the answer
field. There are specific formatting requirements and these
formatting requirements are always given in the question.
Types of questions used
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•
a Casio fx-83GT PLUS scientific calculator
•
an A4 whiteboard and
•
a whiteboard pen.
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1
1. Company XYZ plc has 1,000,000 shares in issue. The firm also has 50,000 warrants
where each warrant will create 3 new shares. If the value of an equivalent
American call option is £2.40, what is the value of a warrant?
(a) £7.20
(b) £6.26
(c) £5.43
(d) £4.16
2. An investor holds 200 shares with a current market value of £5.00. The company
pays a one for ten scrip dividend. The ex-scrip price will be closest to:
(a) £4.40
(b) £4.54
(c) £4.62
(d) £5.00
3. When conducting SWOT analysis (strengths, weaknesses, opportunities and
threats), which two factors are most likely to be considered to be internal, firmspecific factors?
(a) Threats and opportunities
(b) Threats and weaknesses
(c) Strengths and opportunities
(d) Strengths and weaknesses
4. What is the internal rate of return on a zero coupon bond with five years until
redemption, a par value of £1,000, and a current market price of £883.85?
(a) 2%
(b) 2.5%
(c) 3%
(d) 3.5%
5. A credit card charges 2.5% interest per month on outstanding credit balances. The
annual percentage rate (APR) charged to two decimal places is:
Important! You should enter the answer only in numbers strictly using this format: 00.00
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
2
6. Into which phase of the product life cycle would the additional ‘maintenance stage’
and ‘proliferation stage’ best fit?
(a) The introduction phase
(b) The obsolescence phase
(c) The maturity phase
(d) The decline phase
7. A fund manager holds a portfolio of UK equities with a beta (β) value of 1.1, which
is currently valued at £120 million. The FTSE 100 index is currently valued at 6200.
December FTSE 100 futures contracts are priced at 6500. How many December FTSE
100 futures must the fund manager sell to fully hedge the portfolio?
(a) 1,846 contracts
(b) 1,964 contracts
(c) 2,031 contracts
(d) 2,651 contracts
8. The price of sugar falls by 4% which leads to an 8% increase in the quantity of
sugar demanded. What is the price elasticity of demand for sugar?
(a) –2
(b) –0.5
(c) 0.5
(d) 2
9. Consider a two-year 5% annual coupon bond with a face value of £100. If an
investors required return increases from 3.5% to 5%, what is the change in the price
of the bond?
(a) +£4.77
(b) +£3.39
(c) -£1.98
(d) - £2.85
3
10. Which of the following methods of equity issuance is least likely to result in the
sale of shares to the public?
(a) Offer for sale
(b) Offer for sale by tender
(c) Offer for sale by subscription
(d) Placing
11. Which of these would be best described as an intangible asset?
(a) Work in progress
(b) Trade receivables
(c) Goodwill
(d) Cash
12. Acquisitor PLC acquires 100% of the shares of Purchased PLC for £1.5m. Prior to
the acquisition Purchased PLC has the following shareholder funds:
£
Share capital
400,000
Share premium
50,000
Retained profit
600,000
What is the goodwill on acquisition?
(a) £50,000
(b) £450,000
(c) £600,000
(d) £900,000
13. Which of the following is most accurate with respect to an inferior good?
(a) As income rises; the demand curve shifts to the left
(b) As income rises; the demand curve gets steeper
(c) As income falls; the demand curve gets steeper
(d) As income rises; the demand curve shifts upwards
4
14. Which theory about the shape of the yield curve suggests that the bond market is
made up of a number of different parts, each of which has its own supply and demand
conditions?
(a) Liquidity preference theory
(b) Market segmentation theory
(c) Economic theory
(d) Pure expectations theory
15. An investor purchases 5,000 shares at £4.50 per share. The shares pay out a
dividend of 30p per share following which all of the shares are immediately sold for
£4.75 per share. What is the holding period return (HPR)?
(a) 10.88%
(b) 10.92%
(c) 11.84%
(d) 12.22%
16. Which of these ‘Greeks’ is commonly used to denote the sensitivity of option price
with respect to interest rates?
(a) Theta
(b) Gamma
(c) Rho
(d) Vega
17. In an open economy with no government sector, the marginal propensity to import
is 0.3, and the marginal propensity to consume domestic goods is 0.6. The value of
the multiplier is:
(a) 1.43
(b) 1.51
(c) 1.53
(d) 1.61
5
18. A company with a price-earnings ratio of 15x pays a dividend of 20p per share with
dividend cover of 3x. Calculate the share price of the company in pence.
Important! You should enter the answer only in numbers strictly using this format: 000
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
19. Which of these sectors is most likely to benefit from a bear market?
(a) Financials
(b) Consumer staples
(c) Transportation
(d) Capital goods
20. Which of the following could best be considered as a key difference between
hedge funds and conventional funds?
(a) Hedge fund managers have less flexibility than conventional asset managers
(b) Hedge funds are generally less active than conventional funds
(c) Hedge funds are generally less liquid investments than conventional funds
(d) Hedge funds are generally more transparent than conventional funds
6
Several questions are associated with the following exhibit. The material in the exhibit
will not change.
Exhibit X reports economic data for the US and fictional country of Islandia.
1 year
interest
rate
Spot
exchange
rate equal
to US
$1.00
1-year
forward
exchange
rate equal
to US
$1.00
1-year
forecast
inflation
1-year
forecast
real GDP
growth rate
US
1.25%
1.00
1.00
1.25%
1.25%
Islandia
1.50%
0.89
0.91
2.25%
2.00%
When answering these questions assume that purchasing power parity (PPP) applies but
ignore transaction and transport costs.
21. When rounded up, the one-year forward exchange rate quoted for the Islandia
currency in relation to the US dollar quoted in Exhibit X is:
(a) Overvalued by 0.01 relative to the PPP rate
(b) Overvalued by 0.02 relative to the PPP rate
(c) Undervalued by 0.01 relative to the PPP rate
(d) Undervalued by 0.02 relative to the PPP rate
22. Assume that there are zero transaction costs and the interest rate, inflation and
GDP forecasts in Exhibit X are realised. If the Islandia currency appreciates relative to
the US$ over the coming year, which of the following would be the most likely
explanation for the increase?
(a) Inflation forecasts are higher
(b) Real GDP is higher relative to the US
(c) Real interest rates are higher
(d) They are overvalued according to the interest rate parity hypothesis
23. Which of the following inferences about Islandia relative to the US are more
plausible based upon the information provided in Exhibit X?
(a) The balance of payments will rise because the forecast GDP is higher
(b) The balance of payments will rise because the forward exchange rate is at a premium
(c) The balance of payments will rise because the real exchange rate is forecast to fall
(d) The balance of payments will rise because the real exchange rate is forecast to rise
7
24. Using the formula for Interest Rate Parity (IRP) and data provided in Exhibit X,
calculate the difference between the one-year forward exchange rate for Islandia in
Exhibit X and the one-year forward exchange rate implied by the IRP.
Important! You should enter the answer only in numbers strictly using this format: 0.0000
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
25. An investment manager enters into an agreement to receive the return on a
nominal investment of $50 million in the S&P 500 in exchange for fixed payments of
4% of a nominal value of $50 million. Such an agreement would be best described as
an:
(a) Equity swap
(b) Equity put option
(c) Interest rate swap
(d) Equity call option
26. A key difference between a warrant on ABC Ltd ordinary shares, and an exchange
traded call option on ABC Ltd ordinary shares is that:
(a) An increase in the value of ABC shares will increase the value of the call option and
decrease the value of the warrant
(b) Exercise of a warrant will increase the number of ABC shares, unlike the exercise of the
call option
(c) Call options can be traded, warrants cannot be traded
(d) Call options generally have longer lives than warrants
27. An initial amount of £100,000 is invested at a constant rate of 2%. Interest earned
is continuously compounded. What is the value of the investment after 10 years?
(a) £120,000
(b) £121,899
(c) £122,140
(d) £123,543
8
28. A company buys a manufacturing machine for £300,000. It has an economic life of
five years and an anticipated residual value of £50,000. It is depreciated using the
reducing balance method.
The depreciation charge on the machine in year two is closest to:
(a) £50,000
(b) £63,144
(c) £90,360
(d) £93,452
29. What is the primary motivation for a fund manager to lend stocks?
(a) To reduce taxation
(b) To enhance returns
(c) To hedge the portfolio
(d) To reduce risk
30. Classical unemployment would be best described as being due to:
(a) Workers being between jobs
(b) The level of real wages being too high
(c) Inflexible wages and prices leading to an aggregate demand deficiency
(d) Workers being unemployed by choice
31. An investor buys a put option and a call option on the same asset, which both
have the same expiry date and strike price. The position created is best described as
a:
(a) Long straddle
(b) Short straddle
(c) Long strangle
(d) Short strangle
9
32. The monthly returns of a fund over the past year are:
Month
%
Jan
2.5%
Feb
3.0%
Mar
2.4%
Apr
1.0%
May
0.8%
Jun
0.4%
Jul
1.1%
Aug
–1.4%
Sep
0.2%
Oct
–2.2%
Nov
–3.1%
What is the median monthly return?
Important! You should enter the answer only in numbers strictly using this format: 0.0
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
33. When will private equity funds generally distribute carried interest to the fund
manager?
(a) When investors make their initial investment
(b) Monthly
(c) Annually
(d) Following the successful exit of an investment
34. Which of the following is most accurate for a downward sloping yield curve?
(a) Forward rate < Spot rate < Yield
(b) Forward rate > Spot rate > Yield
(c) Spot rate < Yield < Forward rate
(d) Yield < Forward rate < Spot rate
35. Which of the following would be most appropriate for a company wishing to raise
capital from its shareholders?
(a) Scrip issue
(b) Rights issue
(c) Share buyback
(d) Stock split
36. The Keynesian model for an economy describes the:
(a) Long term adjustment of the economy where prices and wages are ‘fully flexible’
(b) Long term adjustment of the economy where prices and wages are ‘sticky’
(c) Short term adjustment of the economy where prices and wages are ‘fully flexible’
(d) Short term adjustment of the economy where prices and wages are ‘sticky’
10
Dec
1.4%
37. Two securities have a covariance of –40. Their standard deviations are 16% and
22%. What is the correlation coefficient between the two securities?
(a) 0.75
(b) 0.55
(c) –0.55
(d) –0.11
38. Which of the following is NOT one of Porter’s Five Competitive Forces?
(a) The business cycle threat
(b) The threat of new entrants
(c) The bargaining power of suppliers
(d) The bargaining power of customers
39. Ordinary shareholders’ voting rights do NOT generally allow them to:
(a) Change the firm’s board of directors
(b) Demand payment of a dividend
(c) Agree that the firm should raise more ordinary share capital
(d) Influence the firm’s corporate policy
40. A house is bought with a 6%, 20 year, £100,000, annual payment repayment
mortgage. The annual payment is closest to:
(a) £7,940
(b) £8,112
(c) £8,718
(d) £9,114
41. An analyst wishes to determine whether a company is undervalued or overvalued
relative to similar companies by using ratios. If they are concerned that the
accounting practices of the firm may lead to distortion, then the ratio which would be
least impacted by accounting distortion would be:
(a) Price/earnings ratio
(b) Price/book ratio
(c) Price/sales ratio
(d) Price/cash flow ratio
11
42. A change in method of depreciation which leads to a higher depreciation charge
will:
(a) Reduce profits
(b) Increase profits
(c) Reduce net cash flow
(d) Increase net cash flow
43. A sample taken by selecting every 10th item from a list of population members is
best described as being a:
(a) Stratified sample
(b) Random sample
(c) Systematic sample
(d) Decimal sample
44. The Macaulay Duration of a bond which has a modified duration of 2.4 and a yield
of 14% is closest to:
(a) 2.11 years
(b) 2.34 years
(c) 2.74 years
(d) 2.89 years
45. The monthly return of an investment over the past six months is:
+0.75%; –0.02%; +1.01%; –0.15%; +1.82%; +1.74%
The geometric mean monthly return is closest to:
(a) 0.818%
(b) 0.855%
(c) 0.914%
(d) 0.932%
12
46. If modified duration is used to estimate the price of a bond following a change in
yield, then the impact of convexity means that the estimated price will be:
(a) Lower than the actual price if yields fall, and higher than the actual price if yields rise
(b) Higher than the actual price if yields fall, and lower than the actual price if yields rise
(c) Higher than the actual price if yields fall, and higher than the actual price if yields rise
(d) Lower than the actual price if yields fall, and lower than the actual price if yields rise
47. A company has zero units of inventory on January 1st.
•
The company buys 200 units at £34 each on January 5th.
•
The company buys a further 300 units at £38 each on January 11th.
•
250 units are sold on January 15th.
•
The company buys a further 100 units at £44 each on January 25th.
•
120 units are sold on January 29th.
What is the balance sheet value of the remaining inventory at the end of January if the
company uses LIFO?
Important! You should enter the answer only in numbers strictly using this format: 0000
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
48. Which of these correlation coefficients between two assets will provide the best
diversification benefits?
(a) +0.9
(b) Zero
(c) –0.1
(d) –0.7
49. Stamp duty reserve tax (SDRT) is charged at:
(a) 0.5% on the purchase of all eligible securities
(b) 0.5% on the sale of all eligible securities
(c) 0.5% on the purchase or sale of all eligible securities
(d) £1 on all purchases of securities over £10,000
13
50. When looking in the notes to the financial statements, an analyst identifies a
potential liability which is NOT predictable enough to have a specific provision in the
accounts. This form of liability would be best described as a(n):
(a) Goodwill liability
(b) Contingent liability
(c) Reserve liability
(d) Intangible liability
51. The default category under IAS 39 for financial liabilities which do NOT meet the
definition of financial liabilities at fair value through profit and loss is:
(a) Fair value through profit and loss
(b) Held to maturity
(c) Loans and receivables
(d) Measured at amortised cost
52. A two-year bond has a face value of £100, annual coupon payout of £6, price of
£103.77, and is yielding a return of 4%. What is the Macaulay duration of the bond?
(a) 1.57 years
(b) 1.69 years
(c) 1.79 years
(d) 1.94 years
53. A 4% Treasury Bond has a dirty price of £104.91, 57 days after its last half-yearly
coupon payment. What is the clean price (in a 365 day year)?
(a) £103.67
(b) £104.29
(c) £105.52
(d) £106.15
14
54. An ordinary share has just paid a dividend of £0.45. If the company is expected to
grow indefinitely at 4%, and its current market value is £3.50 what is the expected
return on the stock?
(a) 12.98%
(b) 14.52%
(c) 17.37%
(d) 18.13%
55. Which bias leads investors to be too slow in reacting to news about an
investment?
(a) Conservatism bias
(b) Overconfidence bias
(c) Sample size neglect
(d) Memory bias
56. A fund begins Year 1 with a value of £14m. At the beginning of Year 2 a further
£6m is deposited in the fund. No further deposits or withdrawals are made during the
two years. If the money-weighted return on the fund over the entire two years is 12%
per annum, what is the value of the fund at the end of year 2?
(a) £20.00m
(b) £21.68m
(c) £24.28m
(d) £25.08m
57. Which of the following is least accurate with regard to American Depositary
Receipts (ADRs)?
(a) They represent investments in a number of non-US shares
(b) They may be traded on the NYSE
(c) They eliminate currency risk for US investors
(d) They allow non-US companies to increase exposure to US investors
15
58. The ‘minimum efficient scale’ (MES) for a firm is best described as the:
(a) Highest level of output where the long run average cost is at a minimum
(b) Lowest level of output where the long run average cost is at a minimum
(c) Highest level of output where the short run average cost is at a minimum
(d) Lowest level of output where the short run average cost is at a minimum
59. What is the present value of a five year annual 6% coupon bond if the discount
rate is 5.5%?
(a) £100.86
(b) £101.34
(c) £102.14
(d) £102.78
60. Which of the following least well reflects an assumption of the CAPM model?
(a) Investors can borrow at a rate which is higher than their lending rate
(b) There are no taxes or transaction costs
(c) Investors all have the same expectations of risk and return
(d) Investors all try to maximise returns and minimise risk
61. The spot €/£ exchange rate is €1.27 = £1.00. One year interest rates in the
Eurozone are 2%; one year interest rates in the UK are 5%. Using interest rate parity,
what is the implied one year €/£ forward rate?
Important! You should enter the answer only in numbers strictly using this format: 0.00
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
62. A machine has an initial cost of £650,000 with a useful life of 5 years.
If the annual straight line depreciation charge is £90,000, what is the expected scrap
value of the machine?
Important! You should enter the number only in numbers strictly using this format: 000,000
Do not include spaces, letters, or symbols (but decimal points and commas should be used
only if indicated)
16
63. International accounting standards requires that goodwill in a business
combination:
(a) Will not be recorded in the balance sheet
(b) Is recorded in the balance sheet at fair value less accumulated impairment charges
(c) Is recorded in the balance sheet at cost less accumulated impairment charges
(d) Is recorded in the balance sheet at amortised cost
64. The version of the efficient market hypothesis which states that a security’s price
reflects all information including insider information is the:
(a) Weak form
(b) Semi-strong form
(c) Total form
(d) Strong form
65. Which of the following is least correct regarding the nature of a normal
distribution?
(a) The shape of the normal distribution is governed by two factors: mean and standard
deviation
(b) The normal distribution curve is symmetrical
(c) Approximately two thirds of observations lie within two standard deviations on either side
of the mean
(d) 50% of observations lie on either side of the mean
66. The technique used by managers of bond funds to ensure that the portfolio has a
duration which is the same as that of the portfolio’s associated liability is best
described as:
(a) Cash flow matching
(b) Credit hedging
(c) Yield matching
(d) Immunisation
67. A deposit of £9,000 earns interest at a rate of 3% per annum which is reinvested
annually. What is the value of the investment after 8 years (to 2 decimal places)?
Important! You should enter the answer only in numbers strictly using this format: 00,000.00
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).’
17
68. Who is the legal owner of the assets held by a unit trust?
(a) The unit holders
(b) The authorised corporate director
(c) The trustees
(d) The fund manager
69. The following items are displayed in an account which reconciles operating profit
and net cash flow.
£
Operating profit
250,000
Increase in trade receivables
12,000
Decrease in trade payables
15,000
Depreciation
24,000
What is the net cash flow?
(a) 229,000
(b) 247,000
(c) 262,000
(d) 274,000
70. A company has revenue of £12m, cost of sales of £6.5m, interest expenses of
£0.5m, and administration expenses of £2m.
What is the company’s operating profit?
(a) £3m
(b) £3.5m
(c) £5m
(d) £5.5m
71. The short term ‘Phillips curve’ suggests that:
(a) Lower inflation is associated with lower unemployment
(b) Lower inflation is associated with higher unemployment
(c) Higher inflation is associated with higher unemployment
(d) There is no relationship between inflation and unemployment
18
72. The psychological bias that leads agents to give too much weight to recent
experience when making forecasts is known as:
(a) Memory bias
(b) Overconfidence
(c) Conservatism bias
(d) Sample size neglect
73. An equity analyst considering the investment potential of Firm A has prepared the
following table of information:
Firm A
Variable (m=millions)
Most recent accounts
Number of shares (m)
200
Warrants outstanding (m)
-
Net income (£m)
40
Dividends paid (£m)
15
Book value of assets (£m)
300
Book value of debt (£m)
100
Equity to total assets ratio
0.67
Shareholders’ funds (£m)
400
What is the dividend growth rate (expressed as a percentage) for Firm A implied by
the retained earnings and return on equity ratios shown in the above table?
Important! You should enter the answer only in numbers strictly using this format: 0.00
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
74. A firm has revenue of £100m, operating costs of £20m, investment expenditure of
£27m, pays an equity dividend of £11m, and pays taxes of £18m. What is the free cash
flow to the firm?
(a) £53m
(b) £42m
(c) £35m
(d) £24m
19
75. With regard to the consumption function, it is most correct to say that:
(a) At zero income the level of consumption is zero
(b) The level of consumption is independent of income
(c) At zero income the level of consumption is known as autonomous consumption
(d) The level of consumption first increases then falls as income increases
76. A fund has a Jensen measure of performance of 2%, whilst the return on the fund
was 12%. During the same period the return on the benchmark portfolio was 10%
and the risk free rate was 3%. Assuming the CAPM is correctly specified and the
fund is well diversified, what is the CAPM beta of the fund?
(a) 0.7
(b) 0.8
(c) 0.9
(d) 1.0
77. Under national income accounting, overall economic activity can be measured in
which of the following ways?
(i) The value of consumer purchases
(ii) The value of output by firms
(iii) The value of expenditure by firms on inputs
(a) (i) only
(b) (ii) only
(c) (ii) and (iii) only
(d) (i), (ii) and (iii) only
78. The highest non-investment grade bond is given which credit rating by Moody’s?
(a) BB+
(b) Ba1
(c) BBB(d) Baa3
20
79. Which of these forms of collective investment schemes would be best described
as being closed ended?
(a) OEIC
(b) Investment trust
(c) ICVC
(d) Unit trust
80. The tracking error of a portfolio would best be described as the:
(a) Standard deviation of the difference in the portfolio and the risk-free rate
(b) Difference between the portfolio and the risk-free rate
(c) Standard deviation of the difference between the portfolio returns and the benchmark
returns
(d) Standard deviation of the difference in the benchmark and the risk-free rate
81. What is the value of the rebased index in year 2 if the index in year 5 is rebased to
a value of 100?
Year
1
2
3
4
5
Value of
index
94
96
106
113
120
Important! You should enter the answer only in numbers strictly using this format: 00 or 000
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
82. If a put option decreased in price by 10p while the underlying asset increased in
price by 25p over the same period, what is the option’s delta value?
(a) 0.4
(b) -0.4
(c) 2.5
(d) -2.5
21
83. The frequency of data in a histogram is represented by the:
(a) Height of the bars
(b) Width of the bars
(c) Number of bars
(d) Area of the bars
84. It is least likely that which of the following can be determined from the statement
of changes in equity?
(a) Dividends paid during the past year
(b) Cost of goods sold during the past year
(c) Net income retained during the past year
(d) New share capital issued during the past year
85. A measure of the decline in value of an investment from its historical peak value is
best described as:
(a) Value at risk
(b) Shortfall
(c) Drawdown
(d) Semi-variance
86. Companies operating in which of the following types of market would maximise
their profits by producing at a quantity such that marginal revenue equals marginal
cost?
(i) Perfect competition
(ii) Monopolistic competition
(iii) Pure monopoly
(a) (i) only
(b) (i) and (ii) only
(c) (ii) and (iii) only
(d) (i), (ii) and (iii)
22
87. An endowment fund has a value of €110 million at the start of the year. In the
middle of the year the fund is worth €95 million, at this time €25 million is paid into the
fund. At the end of the year the fund is worth €126 million. What is the time-weighted
rate of return of the fund over the year?
(a) –9.32%
(b) –2.34%
(c) 4.50%
(d) 8.98%
88. Which of the following characteristics would result in a bond having the highest
duration?
(a) Low coupon and long maturity
(b) High coupon and long maturity
(c) Low coupon and short maturity
(d) High coupon and short maturity
89. Which of these indices is constructed as an unweighted arithmetic index?
(a) S&P 500
(b) CAC 40
(c) Nikkei 225
(d) DAX
90. A 90 day Treasury Bill with a face value of £1,000 is issued for £980. What is the
annualised yield?
(a) 7.76%
(b) 8.28%
(c) 9.24%
(d) 9.66%
91. Which of the following is most true for a positively skewed distribution?
(a) Mode is smaller than median which is smaller than mean
(b) Mean is smaller than median which is smaller than mode
(c) Median is smaller than mode which is smaller than mean
(d) Mode is smaller than mean which is smaller than median
23
92. The Rogers International Commodity Index (RICI) does NOT include which of
these sub-indices?
(a) Energy
(b) Agriculture
(c) Metals
(d) Timber
93. Which of the following will NOT require an adjustment to be made when
reconciling net operating profit with the net cash flow from operating activity?
(a) Increase in dividend paid
(b) Decrease in trade receivable
(c) Depreciation charge
(d) Increase in inventories
94. What is the purpose of an income statement?
(a) To summarise cash movements during the year
(b) To summarise the movements in equity accounts during the year
(c) To reconcile assets and liabilities
(d) To provide information on the performance of the business over a specified period of time
24
The next four questions are associated with the following case study. The material
given in the case study will not change.
A high net worth investor is discussing the performance of his portfolio with his advisor. The
advisor has collated the following data about the portfolio and the benchmark portfolio:
Exhibit 1
Return on portfolio
Risk free return
Portfolio standard deviation
Portfolio beta (β)
Return on the benchmark
portfolio
Return on the market
= 6%
= 2%
= 20%
= 1.6
= 7%
= 4%
The investor also asks the investor to give him additional information about Exchange
Traded Funds and REITS, both of which he is interested in adding to his portfolio.
95. Using the information in Exhibit 1 calculate the Jensen measure of the portfolio.
Important! You should enter the answer only in numbers strictly using this format: 0.0
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
96. Using the information in Exhibit 1 calculate the Treynor measure of the portfolio.
Important! You should enter the answer only in numbers strictly using this format: 0.0
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
97. Using the information in Exhibit 1 calculate the Sharpe measure of the portfolio.
Important! You should enter the answer only in numbers strictly using this format: 0.0
Do not include spaces, letters or symbols (but decimal points and commas should be used if
indicated).
98. If the investor wished to know the information ratio of their portfolio, what
additional portfolio data would the advisor need to produce?
(a) The active error
(b) The holding period return
(c) The tracking error
(d) The time weighted rate of return
25
99. Which of the following is least accurate with regard to exchange traded funds
(ETFs)?
(a) ETFs are traded on the London Stock Exchange
(b) ETFs must be UCITS compliant to obtain FCA recognition
(c) ETFs are passively managed
(d) ETFs trade once a day at closing market prices
100. What is the minimum amount of a REIT’s net taxable profits which must be
distributed to investors?
(a) 50%
(b) 75%
(c) 90%
(d) 95%
101. When price volatility increases over time, which of the following is most likely to
occur:
(a) Tracking error decreases
(b) Correlations between securities decrease
(c) Effective diversification becomes easier
(d) Correlations between securities increase
102. A well diversified portfolio has a CAPM beta of 1.1 and a covariance of return
with the market of 250. What is the variance of the return on the market?
(a) 198.8
(b) 206.6
(c) 215.9
(d) 227.3
103. Which of the following is considered a hard commodity?
(a) Wheat
(b) Pork Bellies
(c) Aluminium
(d) Coffee
26
104. In a private equity partnership, which of the following terms best describes the
investment managers?
(a) Equal partners
(b) Limited partners
(c) General partners
(d) Senior partners
105. Which of the following is NOT a criteria that a benchmark needs to satisfy in
order to be a meaningful performance tool?
(a) Responsible
(b) Measurable
(c) Specified in advance
(d) Investable
27
Answers
1. (b)
Warrant price:
𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜
𝑖𝑖𝑖𝑖 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑠𝑠ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎 𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 𝑎𝑎𝑎𝑎𝑎𝑎 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 ]
= [1+ % 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎
x No. of new shares created by each warrant
2.40
= 1.15 x 3 = £6.26
2. (b)
200 shares
x £5.00
=
£1000
20 new shares received (free)
=
£0
220 shares held
=
£1000
New share price =
x ?
£1000
220
= £4.54
3. (d)
4. (b)
5. 34.49
£𝟏𝟏𝟏𝟏𝟏𝟏𝟏𝟏
(𝟏𝟏+𝒓𝒓)𝟓𝟓
= £883.85; r = 0.025; r = 2.5%
r = (1+0.025)12 – 1 = 0.344888 = 34.49%
6. (c)
7. (c)
Number of futures =
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐 ℎ 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣 𝑜𝑜𝑜𝑜 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐
xβ
£120𝑚𝑚
Number of futures = [6500 𝑥𝑥 £10] x 1.1 = 2031
8. (a) Price elasticity of demand =
=
+8%
−4%
= –2
28
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑜𝑜𝑜𝑜 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
9.(d)
£5
£105
Price (3.5%) = (1+0.035)1 + (1+0.035)2 = £102.85
£5
£105
= (1+0.05)1 + (1+0.05)2
Price (5%)
10. (d)
= £100.00
11. (c)
12. (b) £1,500,000 – [£400,000 + £50,000 + £600,000] = £450,000
13. (a)
14. (b)
15. (d) HPR
=
=
(𝑀𝑀𝑀𝑀 𝐸𝐸 −𝑀𝑀𝑀𝑀𝐵𝐵 )+𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷
𝑀𝑀𝑀𝑀 𝐵𝐵
(£4.75 −£4.50) + £0.30
£4.50
= 12.22%
16. (c)
17. (a)
Multiplier
1
= 1 −(𝑐𝑐 −𝑒𝑒)
1
= 1 −(0.6 −0.3)
= 1.43
18. 900
𝐸𝐸𝐸𝐸𝐸𝐸
20𝑝𝑝
= 3x (Dividend cover)
EPS = 60p
𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺𝑺 𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑𝒑
60𝑝𝑝
= 15x (P/E ratio)
Share price = 60 x 15 = 900p
19. (b)
20. (c)
29
× 100%
× 100%
21. (c)
Expected future spot rate based on PPP:
= spot $/Islandia exchange rate ×
(1+𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 )𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
(1+𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 )$
(1.0225)
= 0.89 × (1.0125)
= 0.8988
One year forward exchange rate = 0.91
Hence one-year forward rate undervalues the Islandia
22. (b)
23. (c)
24. 0.0178
1.015
0.91 – [0.89 x 1.0125 ]
= 0.0178
25. (a)
26. (b)
27. (c)
= Deposit x ert
= £100,000 x e0.02x10
= £100,000 xe0.2
= £122,140
28. (b) Annual depreciation charge:
𝑛𝑛
Depreciation rate = 1 − �
5
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
£50,000
= 1 − �£300,000
= 0.3012 = 30.12%
Annual depreciation charge in year one
Annual depreciation charge in year two
29. (b)
30. (b)
30
= 30.12% × £300,000 = £90,360
= 30.12% × (£300,000 – £90,360)
= £63,144
31. (a)
32. 0.9
Returns in order of size:
–3.1%, –2.2%, –1.4%, 0.2%, 0.4%, 0.8%, 1.0%, 1.1%, 1.4%, 2.4%, 2.5%, 3.0%
Median is average of 6th and 7th value
Median value = (0.8% + 1.0%)/2 = 0.9%
33. (d)
34. (a)
35. (b)
36. (d)
37. (d) Correlation coefficient
=
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 (𝑥𝑥,𝑦𝑦)
𝜎𝜎𝑥𝑥 𝜎𝜎𝑦𝑦
−40
= 16 × 22
38. (a)
= –0.11
39. (b)
40. (c)
𝑑𝑑 (1 + 𝑟𝑟)𝑇𝑇 −𝑇𝑇
𝑟𝑟
𝑑𝑑 (1.06)20 −𝑑𝑑
20
(1.06) +
0.06
DT = D0(1 + r)T +
0 = –£100,000
£320,713.54 = d × 36.785
D = £8,718
41. (d)
42. (a)
43. (c)
44. (c) Modified duration
Macaulay duration
=
𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
(1 +𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 )
= Modified duration × (1 + yield)
= 2.4 × (1.14)
= 2.736 = 2.74 years
45. (b)
(1.0075 × 0.9998 × 1.0101 × 0.9985 × 1.0182 × 1.0174)1/6 – 1 = 1.00855 = 0.855%
46. (d)
31
47. 7940
Date
Change in
inventory
(LIFO)
Inventory
Jan 1st
Zero
Jan 5th
Buy 200 @ £34
Jan 11th
Buy 300 @ £38
Jan 15th
Sell 250 @ £38
Jan 25th
Buy 100 @ £44
Jan 29th
Sell 120:
100 @ £44
20 @ £38
£6,800
[200 @ £34] = £6,800
£11,400
[200 @ £34 + 300 @ £38] = £18,200
(£9,500)
[200 @ £34 + 50 @ £38] = £8,700
£4,400
[200 @ £34 + 50 @ £38 + 100 @ £44] =
£13,100
(£4,400)
(£760)
End of Jan Inventory
[200 @ £34 + 30 @ £38] = £7,940
£7,940
48. (d)
49. (a)
50. (b)
51. (d)
52. (d)
Macaulay duration =
=
=
𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐 ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 2
ℎ 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 1
x 2]
x 1] + [
[𝑃𝑃𝑃𝑃 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃
98.00
5.77
x 1 ] + [103.77 x 2 ] = 1.94
[103.77
53. (b)
Dirty price
= £104.91
Accrued interest [£2 x 57/182.5]
= (£0.62)
Clean price
= £104.29
32
54. (c) Expected return
=
𝑑𝑑 0 × (1+𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ℎ)
+ 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔ℎ
𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣
£0.45 ×(1+0.04)
+ 0.04
£3.50
=
= 0.1737 = 17.37%
55. (a)
56. (c)
= £14m x 1.12 = £15.68
= Add deposit at start of year 2: £15.68 + £6 = £21.68
= £21.68 x 1.12 = £24.28m
57. (c)
58. (b)
59. (c) PV
= £102.14
£6
£6
£6
£106
£6
= (1+0.055)1 + (1+0.055)2 + (1+0.055)3 + (1+0.055)4 + (1+0.055)5
60. (a)
61. 1.23
(1+𝑅𝑅)
Forward €/£ exchange rate = spot €/£ exchange rate × (1+𝑅𝑅)€
= €1.27 ×
= €1.23
(1.02)
(1.05)
£
62. 200,000
Expected scrap value = £650,000 – (£90,000 x 5) = £200,000
63. (c)
64. (d)
65. (c)
66. (d)
67. 11,400.93
£9,000 x 1.038 = 11,400.93
68. (c)
69. (b)
Operating profit – increase in trade receivables – decrease in trade payables + depreciation.
250,000 - 12,000 - 15,000 + 24,000 = £247,000
33
70. (b)
Revenue – Cost of sales – Administration expenses = Operating profit
12m – 6.5m – 2m = £3.5m
71. (b)
72. (a)
73. 6.25%
Dividend growth rate = proportion of profits retained x return on equity
= 0.625 x 0.1
= 0.0625 = 6.25%
74. (c)
FCFF = Revenues – operating costs – taxes – investment expenditure
= 100 – 20 – 27 – 18
= £35m
75. (c)
76. (d) An actual return of 12% and alpha of 2% indicates that the expected return was 10%.
An expected return of 10% would have been achieved with a beta of 1.
77. (d)
78. (b)
79. (b)
80. (c)
81. 80
Re-based index value =
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 2
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎 𝑡𝑡ℎ𝑒𝑒 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑎𝑎𝑎𝑎 𝑤𝑤ℎ𝑖𝑖𝑖𝑖ℎ 𝑤𝑤𝑤𝑤 𝑤𝑤𝑤𝑤𝑤𝑤 ℎ 𝑖𝑖𝑖𝑖 𝑡𝑡𝑡𝑡 𝑏𝑏𝑏𝑏 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟
82. (b)
Delta =
Delta =
83. (d)
84. (b)
85. (c)
86. (d)
34
𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑛𝑛 𝑡𝑡ℎ𝑒𝑒 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
−10𝑝𝑝
25𝑝𝑝
= -0.4
x 100 =
96
120
x 100 = 80
87. (a) HPR for first half of the year =
(€95 − €110) + 0
€110
× 100%
= –13.64%
€25 million is paid into the fund; its new value is (€95 million + €25 million) =
€120 million
(€126 − €120) + 0
HPR for second half of the year =
= 5%
TWRR = (1 – 0.1364) × (1 + 0.05) –1
= –9.32%
€120
× 100%
88. (a)
89. (c)
90. (b) Annualised yield =
91. (a)
£1,000−£980
£980
×
365
90
× 100% = 8.28%
92. (d)
93. (a)
94. (d)
95. 0.8
Jensen Measure
= Rp – [Rf + βp (Rm – Rf)
= 6 – [2 + 1.6(4 – 2)]
= 0.8%
96. 2.5
Treynor Measure
=
=
𝑅𝑅𝑃𝑃 −𝑅𝑅𝑓𝑓
𝛽𝛽 𝑃𝑃
6% − 2%
1.6
= 2.5
97. 0.2
Sharpe Measure
=
=
𝑅𝑅𝑃𝑃 −𝑅𝑅𝑓𝑓
𝜎𝜎𝑃𝑃
6%−2%
20
= 0.2
98. (c)
99. (d)
100. (c)
101. (d)
102. (d) β =
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉
250
1.1 = 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉
Variance = 227.3
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103. (c)
104. (c)
105. (a)
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